Statements of
Accounting Standards (AS 5) Revised
Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies
(In this Accounting Standard, the standard
portions have been set in bold italic type. These should
be read in the context of the background material which has been
set in normal type, and in the context of the 'Preface to the Statements
of Accounting Standards'.)
The following is the text of the revised
Accounting Standard (AS) 5, 'Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies', issued by
the Council of the Institute of Chartered Accountants of India.
This revised standard comes into effect
in respect of accounting periods commencing on or after 1.4.1996
and is mandatory in nature. It is clarified that in respect of accounting
periods commencing on a date prior to 1.4.1996, Accounting Standard
5 as originally issued in November, 1982 (and subsequently made
mandatory) will apply.
Objective
The objective of this Statement is to
prescribe the classification and disclosure of certain items in
the statement of profit and loss so that all enterprises prepare
and present such a statement on a uniform basis. This enhances the
comparability of the financial statements of an enterprise over
time and with the financial statements of other enterprises. Accordingly,
this Statement requires the classification and disclosure of extraordinary
and prior period items, and the disclosure of certain items within
profit or loss from ordinary activities. It also specifies the accounting
treatment for changes in accounting estimates and the disclosures
to be made in the financial statements regarding changes in accounting
policies.
Scope
1. This Statement should be applied
by an enterprise in presenting profit or loss from ordinary activities,
extraordinary items and prior period items in the statement of profit
and loss, in accounting for changes in accounting estimates, and
in disclosure of changes in accounting policies.
2. This Statement deals with, among
other matters, the disclosure of certain items of net profit or
loss for the period. These disclosures are made in addition to any
other disclosures required by other Accounting Standards.
3. This Statement does not deal with
the tax implications of extraordinary items, prior period items,
changes in accounting estimates, and changes in accounting policies
for which appropriate adjustments will have to be made depending
on the circumstances.
Definitions
4. The following terms are used in this
Statement with the meanings specified:
Ordinary activities are any activities
which are undertaken by an enterprise as part of its business and
such related activities in which the enterprise engages in furtherance
of, incidental to, or arising from, these activities.
Extraordinary items are income
or expenses that arise from events or transactions that are clearly
distinct from the ordinary activities of the enterprise and, therefore,
are not expected to recur frequently or regularly.
Prior period items are income
or expenses which arise in the current period as a result of errors
or omissions in the preparation of the financial statements of one
or more prior periods.
Accounting policies are the specific
accounting principles and the methods of applying those principles
adopted by an enterprise in the preparation and presentation of
financial statements.
Net Profit or Loss for the Period
5. All items of income and expense which
are recognised in a period should be included in the determination
of net profit or loss for the period unless an Accounting Standard
requires or permits otherwise.
6. Normally, all items of income and
expense which are recognised in a period are included in the determination
of the net profit or loss for the period. This includes extraordinary
items and the effects of changes in accounting estimates.
7. The net profit or loss for the period
comprises the following components, each of which should be disclosed
on the face of the statement of profit and loss:
(a) profit or loss from ordinary activities;
and
(b) extraordinary items.
Extraordinary Items
8. Extraordinary items should be disclosed
in the statement of profit and loss as a part of net profit or loss
for the period. The nature and the amount of each extraordinary
item should be separately disclosed in the statement of profit and
loss in a manner that its impact on current profit or loss can be
perceived.
9. Virtually all items of income and
expense included in the determination of net profit or loss for
the period arise in the course of the ordinary activities of the
enterprise. Therefore, only on rare occasions does an event or transaction
give rise to an extraordinary item.
10. Whether an event or transaction
is clearly distinct from the ordinary activities of the enterprise
is determined by the nature of the event or transaction in relation
to the business ordinarily carried on by the enterprise rather than
by the frequency with which such events are expected to occur. Therefore,
an event or transaction may be extraordinary for one enterprise
but not so for another enterprise because of the differences between
their respective ordinary activities. For example, losses sustained
as a result of an earthquake may qualify as an extraordinary item
for many enterprises. However, claims from policyholders arising
from an earthquake do not qualify as an extraordinary item for an
insurance enterprise that insures against such risks.
11. Examples of events or transactions
that generally give rise to extraordinary items for most enterprises
are:
– attachment of property of the enterprise;
or
– an earthquake.
Profit or Loss from Ordinary Activities
12. When items of income and expense
within profit or loss from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain
the performance of the enterprise for the period, the nature and
amount of such items should be disclosed separately.
13. Although the items of income and
expense described in paragraph 12 are not extraordinary items, the
nature and amount of such items may be relevant to users of financial
statements in understanding the financial position and performance
of an enterprise and in making projections about financial position
and performance. Disclosure of such information is sometimes made
in the notes to the financial statements.
14. Circumstances which may give rise
to the separate disclosure of items of income and expense in accordance
with paragraph 12 include:
(a) the write-down of inventories to
net realisable value as well as the reversal of such write-downs;
(b) a restructuring of the activities
of an enterprise and the reversal of any provisions for the costs
of restructuring;
(c) disposals of items of fixed assets;
(d) disposals of long-term investments;
(e) legislative changes having retrospective
application;
(f) litigation settlements; and
(g) other reversals of provisions.
Prior Period Items
15. The nature and amount of prior period
items should be separately disclosed in the statement of profit
and loss in a manner that their impact on the current profit or
loss can be perceived.
16. The term 'prior period items', as
defined in this Statement, refers only to income or expenses which
arise in the current period as a result of errors or omissions in
the preparation of the financial statements of one or more prior
periods. The term does not include other adjustments necessitated
by circumstances, which though related to prior periods, are determined
in the current period, e.g., arrears payable to workers as a result
of revision of wages with retrospective effect during the current
period.
17. Errors in the preparation of the
financial statements of one or more prior periods may be discovered
in the current period. Errors may occur as a result of mathematical
mistakes, mistakes in applying accounting policies, misinterpretation
of facts, or oversight.
18. Prior period items are generally
infrequent in nature and can be distinguished from changes in accounting
estimates. Accounting estimates by their nature are approximations
that may need revision as additional information becomes known.
For example, income or expense recognised on the outcome of a contingency
which previously could not be estimated reliably does not constitute
a prior period item.
19. Prior period items are normally
included in the determination of net profit or loss for the current
period. An alternative approach is to show such items in the statement
of profit and loss after determination of current net profit or
loss. In either case, the objective is to indicate the effect of
such items on the current profit or loss.
Changes in Accounting Estimates
20. As a result of the uncertainties
inherent in business activities, many financial statement items
cannot be measured with precision but can only be estimated. The
estimation process involves judgments based on the latest information
available. Estimates may be required, for example, of bad debts,
inventory obsolescence or the useful lives of depreciable assets.
The use of reasonable estimates is an essential part of the preparation
of financial statements and does not undermine their reliability.
21. An estimate may have to be revised
if changes occur regarding the circumstances on which the estimate
was based, or as a result of new information, more experience or
subsequent developments. The revision of the estimate, by its nature,
does not bring the adjustment within the definitions of an extraordinary
item or a prior period item.
22. Sometimes, it is difficult to distinguish
between a change in an accounting policy and a change in an accounting
estimate. In such cases, the change is treated as a change in an
accounting estimate, with appropriate disclosure.
23. The effect of a change in an accounting
estimate should be included in the determination of net profit or
loss in:
(a) the period of the change, if the
change affects the period only; or
(b) the period of the change and future
periods, if the change affects both.
24. A change in an accounting estimate
may affect the current period only or both the current period and
future periods. For example, a change in the estimate of the amount
of bad debts is recognised immediately and therefore affects only
the current period. However, a change in the estimated useful life
of a depreciable asset affects the depreciation in the current period
and in each period during the remaining useful life of the asset.
In both cases, the effect of the change relating to the current
period is recognised as income or expense in the current period.
The effect, if any, on future periods, is recognised in future periods.
25. The effect of a change in an accounting
estimate should be classified using the same classification in the
statement of profit and loss as was used previously for the estimate.
26. To ensure the comparability of financial
statements of different periods, the effect of a change in an accounting
estimate which was previously included in the profit or loss from
ordinary activities is included in that component of net profit
or loss. The effect of a change in an accounting estimate that was
previously included as an extraordinary item is reported as an extraordinary
item.
27. The nature and amount of a change
in an accounting estimate which has a material effect in the current
period, or which is expected to have a material effect in subsequent
periods, should be disclosed. If it is impracticable to quantify
the amount, this fact should be disclosed.
Changes in Accounting Policies
28. Users need to be able to compare
the financial statements of an enterprise over a period of time
in order to identify trends in its financial position, performance
and cash flows. Therefore, the same accounting policies are normally
adopted for similar events or transactions in each period.
29. A change in an accounting policy
should be made only if the adoption of a different accounting policy
is required by statute or for compliance with an accounting standard
or if it is considered that the change would result in a more appropriate
presentation of the financial statements of the enterprise.
30. A more appropriate presentation
of events or transactions in the financial statements occurs when
the new accounting policy results in more relevant or reliable information
about the financial position, performance or cash flows of the enterprise.
31. The following are not changes in
accounting policies :
(a) the adoption of an accounting policy
for events or transactions that differ in substance from previously
occurring events or transactions, e.g., introduction of a formal
retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement; and
(b) the adoption of a new accounting
policy for events or transactions which did not occur previously
or that were immaterial.
32. Any change in an accounting policy
which has a material effect should be disclosed. The impact of,
and the adjustments resulting from, such change, if material, should
be shown in the financial statements of the period in which such
change is made, to reflect the effect of such change. Where the
effect of such change is not ascertainable, wholly or in part, the
fact should be indicated. If a change is made in the accounting
policies which has no material effect on the financial statements
for the current period but which is reasonably expected to have
a material effect in later periods, the fact of such change should
be appropriately disclosed in the period in which the change is
adopted.
|
